Last week, I ran an article about looking for ways to cut your prices in half. I asked you to consider finding ways to make that kind of cut possible over a period of five years. The concern I’m addressing is the change in market conditions resulting in lowered demand and increased supply. My contention is that prices will drop.
I got lots of interesting reactions.
One response in particular makes me kind of crazy.
It’s the “you’ve got to grow revenues, not cut expenses, if you’re going to win in the long run” response that bothers me.
You see, I know that kind of thinking.
I spent nearly two decades thinking that way. I was very much a “grow your top line and the bottom line will take care itself” advocate.
I learned the hard way that thinking that way is amateurish and unprofessional. It’s the way people think when they haven’t really been challenged by the ups and downs of running a business.
It’s easy to be successful as an amateur when revenues are going up. Your mistakes are hidden by the rising revenues.
It’s when revenues level off or turn down that you really figure out how to run a business. Many of us saw that happen in 2009.
When you start learning those lessons, you realize what a fool you’ve been for running your business so poorly during the ride up. You squandered resources, you wasted assets, and you made decisions that cost everyone in your organization opportunities.
When revenues drop, you get serious about making smart decisions. You learn some things by losing lots of money, and in many ways, those lessons are the most valuable learning.
Some suggest that running a business is simple. I think running a business can be fairly simple when revenues are relatively low. You do your accounting on a cash basis, you get a feel for the ups and downs, and you can make decisions by gut reaction.
When the numbers grow, when revenues are in the millions, and when the headcount soars up and up, it gets much harder for an amateur to run a business. At that point, you either turn pro, or you hire someone with experience. It’s not a seat-of-the-pants situation anymore, and gut reactions won’t carry the day. You need a numbers-based decision-making process.
I’ve been in the situation where revenues are rising, millions of dollars are flowing in each year, and profits still remain elusive. It’s shockingly easy to spend a year or more dominating a market, growing the top line, and still walking away with nothing to show for it.
Growing revenues is not the solution to all problems. Raising prices isn’t the answer either. Marketing matters and sales matter, but not without reference to cost.
A successful business needs a balance between price and cost, audience and action. You’ve can’t ignore any element, and you can’t overly emphasize any element. Failing to keep an eye on cost is a quick path to disaster.
That’s what a professional will tell you. There’s no faster way to learn that reality than writing a check to cover the losses when cost exceeds price.
